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TMI Blog1990 (3) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1913. Under the articles of association of the company, the promoters who were the first subscribers to the memorandum of association were the permanent directors. The company carried on a business in motor and general finance. One of the creditors of the company filed a petition, being Company Petition No. 22 of 1968, on February 19, 1968, against the company for its winding up, on the ground that it was unable to pay its debts. Vide order dated July 17, 1969, the company was wound up and the official liquidator attached to this court was appointed the liquidator of the company. The official liquidator moved an application, being Company Application No. 311 of 1974, for summons under sections 542, 543 read with sections 538 and 541 of the Companies Act, thereby seeking various reliefs, including a declaration and orders that the business of the company had been carried on from November 15, 1949, to the date of the commencement of the winding up petition and also up to the order of winding up, with intent to defraud the creditors by respondents Nos. 1 to 12 who were the managing director/directors of the company ; that respondents Nos. 1 to 12 had misapplied and retained m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her alleged by the applicant that, as far as respondent No. 4 is concerned, no case has been made out. In fact, he resigned from the directorship of the company by a letter dated October 14,1967, and his resignation was accepted by the company, vide resolution passed at the meeting held on March 6, 1968. According to the applicant, the proceedings under sections 542 and 543 of the Act have been filed by the official liquidator thereby impleading all the directors of the company who, at one time or the other, happened to be directors, without any application of mind. The further case of respondent No. 4 is that there is nothing on record to show that he was guilty of misfeasance, or at any stage, misapplied or misused the funds or property of the company or defrauded the creditors. The applicant was just an employee of another associate company when he was made director of the company for administrative purposes though he never exercised nor was he allowed to exercise any power. He was just designated director without any power. The entire control was under the tight grip of Shri B.K. Bedi and Shri G.S. Puri, who were the joint managing directors. With regard to the allegation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted to him and which may amount to misfeasance or malfeasance. The applicant always acted bona fide, reasonably, diligently and earnestly, with a view to promote the interest of the company during the period he was associated with the company. All the allegations made by the official liquidator do not concern the applicant. With regard to the objection that the present application is not maintainable under rule 9 of the Companies (Court) Rules, 1959, Mr. Sistani submits that the same is maintainable as the allegations made by the official liquidator in his application are very vague and no specific allegation has been made against the applicant. If this court finds that the application is not maintainable under rule 9 then the same can be treated as an application under section 633 of the Act. Mr. B.N. Nayyar, appearing for the official liquidator, contended that the liabilities of all the directors are joint and several under the Act. A director is, in fact, a trustee and he is in a fiduciary capacity. A director is required to use diligence and act honestly and reasonably in the discharge of his duties as a director. A director cannot sleep over the affairs of the company. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le or accountable for any money or property of the company or been guilty of any misfeasance or breach of trust in relation to the company. Now, as already stated, the appellants did not come by the money which is now sought to be recovered from them in their capacity as directors. Being creditors, they were paid, though perhaps wrongly, what was due to them by the former liquidator and could not, therefore, be said to be in possession of any funds as such of the company. They only received repayment of the loans advanced by them. Therefore, there could be no question of their having misapplied or retained or become liable or accountable in any way for any money or property of the company or being guilty of any misfeasance or breach of trust. In these circumstances, it is difficult to see how they can be asked under section 235 to refund what they have received."(p. 197) In Central Calcutta Bank Ltd., In re [1959] 29 Comp. Cas. 437 ; AIR 1959 Cal 625, while interpreting the scope of section 235 of the Indian Companies Act, 1913, the Calcutta High Court held : "It has been held that section 235 of the Indian Companies Act, 1913, gives a summary remedy only against such directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one would be release or discharge of others. But, it has been held that an application for misfeasance stands on a different footing and a director can maintain a suit for contribution against his co-directors in respect of damages paid for misfeasance and the liability to contribute survives in the case of death of a co-director. Reference may be made to the case of Ramskill v. Edwards [1886] 31 Ch 100. So, the general principle of liability of joint tortfeasors cannot apply to misfeasance proceedings. It has also been pointed out by Mr. A.K. Sen on behalf of the liquidator that the directors in the present case cannot be regarded as joint tortfeasors in any sense of the term. In order that persons may be joint tortfeasors, there must be a common design and a concerted action. Learned counsel has referred to Clerk and Lindsell on Torts, page 108, 11th edition, and to The Koursk, 1924 page 140 at 151 to 152 per Bankes L. J. and at pages 156 to 159 per Scrut-ton L.J. In the present case, no conspiracy or concerted action is alleged or proved. It has also been pointed out by Mr. Sen, and I think rightly, that separate suits or applications can be filed against different dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the valuation of stocks or investments or matters in which it will be normal and convenient for such a colleague of theirs to have day-to-day control. One of such cases may be where such a colleague is himself an expert. The Legislature has not formulated precise rules for guidance in these matters and it is, therefore, undesirable on my part to attempt to do so and each case must turn on its own facts. The wise application of the Act appears to be to hold that the amount of check, control and caution to be exercised by a director is a question of degree in each individual case. The achievement of goals for which a corporation is brought into existence would be impossible if people could not trust others for the express purpose of attending to the details of management. I would, therefore, decline an application under section 235 on the mere ground that the directors trusted regularly authorised officers of the company and failed to detect and have been misled by concealment by such officers when there was no reason for doubting their fidelity. The test in all such cases should be whether there has been an act of commission or omission on the part of the directors amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this sum and this breach of trust has undoubtedly resulted in pecuniary loss to the company resulting in its liquidation to the great detriment of its shareholders. If the directors acted honestly, they would not have committed any breach of trust and consequently there would not have been any loss to the company. But from the evidence on record as adduced by the official liquidator I am satisfied that respondent No. 3, Ranadeb Chowdhury, was an innocent director and is not liable for the fraud of his other co-director, namely, M.N. Mitra. It has also been held that it is no part of the duty of the directors to scrutinise or examine the entries in the books of account of the company and when there is nothing to raise suspicion in the mind of a director no question of any abstention from any enquiry can arise. Following this principle, it was in the knowledge of M.N. Mitra and M.N. Mitra alone about the misappropriation of this huge sum of money belonging to the company and I am satisfied that Mr. Ranadeb Chowdhury had no knowledge of that and as it was no part of his duty to scrutinise or examine the books of account of the company, he is not liable for such breach of trust."( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther a director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence so that he could not be held liable for conniving at fraud and misappropriation which takes place. A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the company. It is not necessary that the liquidator must make a specific or separate application for public examination of the directors of a banking company in liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r my benefit, reference can be made to two other judgments. In Official Liquidator, Milan Chit Fund and Finance P. Ltd. v. Joginder Singh Kohli [1978] 48 Comp. Cas. 357 (Delhi), one of the questions which arose for determination was whether, in the absence of any specific allegations against some of the respondents as directors of the company in liquidation in the application filed by the official liquidator under sections 542 and 543 of the Act, the proceedings could continue against such respondents. H. L. Anand J. held : "It, however, appears on a perusal of the application that apart from the vague allegations made against all the directors in relation to the conduct of the business of the company there is no specific allegation made against this respondent in the application. In the circumstances, it would be an abuse of the process of this court to proceed against this respondent in the absence of any specific allegations. The application must, therefore, be dismissed in so far as this respondent is concerned. On behalf of respondents Nos. 4 and 5, who happen to be husband and wife, respectively, a preliminary objection is raised that the application could not proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he happened to be a director of the company. The liability to pay such an amount can neither be considered a fraudulent act nor tantamount to misapplication or retention of money or property of the company or be described as an act of misfeasance or breach of trust in relation to the company. It amounts to a failure to discharge a legal obligation as a member which can be enforced in accordance with law. The petition must, therefore, fail as against this respondent as well. In the result the application is dismissed as against respondents Nos. 3 to 6. C.A. No. 157 of 1975 is disposed of in these terms. The application is, however, proper and competent against the other respondents."(at pages 366, 367) In Premier Credit and Motors Co. (P.) Ltd. (In Liquidation) v. Shafiqur Rehman [1987] 3 Comp LJ 197 (All), the case was that after the order of winding up, the official liquidator filed an application under sections 542, 543, etc., of the Act against the delinquent directors for various reliefs, inter alia, on the grounds that the delinquent directors had conducted the business of the company in a fraudulent manner and for fraudulent purposes in relation to its creditors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e evidence in respect of an individual director or officer of an act of the nature contemplated by section 543(1). In the absence of such positive evidence, it may not be possible to compel him to reimburse or compensate the company. To borrow the words of the Supreme Court in Official Liquidator v. Raghawa Desikachar, AIR 1974 SC 2069 ; [1975] 45 Comp. Cas. 136 (SC) : '... it may be mentioned that misfeasance action against the directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For this reason, the application should contain a detailed narration of the specific acts of commission and omission on the part of each director quantifying the loss to the company arising out of such acts or omission. The burden of proving misfeasance or non-feasance rests on the official liquidator.... The application made by the official liquidator did not give sufficient particulars which, in our view, it should have.' These observations clearly upheld the view taken by this court in Official Liquidator v. Mathura Prasad, AIR 1963 All 55, in which the principles about the pleadings and proof in proceedings under section 235 of the Act of 1913 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liabilities of the company as the court may direct. On the hearing of an application under this sub-section, the official liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses. (2) ( a )Where the court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration. ( b )In particular, the court may make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf. ( c )The court may, from time to time, make such further order as may be necessary for the purpose of enforcing any charge imposed under this sub-section. ( d )For the purpose of this sub-section, the expression 'assignee' includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 633 of the Act. Depending upon the facts and circumstances of a case and to meet the ends of justice and/or to prevent the abuse of the process of court, the court can drop proceedings under sections 542 and 543 of the Act or dismiss such an application against any party to the proceedings at any stage. In the present case, the petition for winding up was filed on February 19, 1968, and the company was wound up, vide order dated July 17, 1969. The official liquidator filed the application, being C.A. No. 311 of 1974, under sections 542 and 543 of the Act on July 22, 1974, against 12 respondents. Respondent No. 4 filed the present application only in the year 1986. Thus, under these circumstances, it is necessary to dispose of the application of respondent No. 4 without awaiting the disposal of the main application which may take a considerable time. Under section 542 of the Act, the courts may declare that any person, who was knowingly a party to the carrying on of the business of the company, which was carried on with an intent to defraud its creditors or other persons, or was for fraudulent purpose, is personally responsible, without any limitation of liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney or property of the company or, otherwise, is guilty of any misfeasance or breach of trust in relation to the company. It is thus clear that, to enable the court to examine the conduct of an individual director or officer and to pass an effective order to make him personally liable for misapplication, etc., of the money or the property of the company, there has to be positive and specific evidence and pleadings in respect of the individual director of an act of the nature contemplated by the section. In the absence of such specific allegations and positive evidence, it is not possible or proper for the court to indulge in a fishing or roving enquiry so as to compel the individual director to reimburse and/or compensate the company. The principles with regard to the pleadings and proof are well-settled. There cannot be a general and roving enquiry into the conduct of a person sought to be made liable. As held in Central Calcutta Bank Ltd., In re [1959] 29 Comp. Cas. 437 ; AIR 1959 Cal 625, the general principle of liability of joint tort-feasors cannot apply to misfeasance proceedings and, in order that a person may be a joint tortfeasor, there must be a common design and a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No. 4. The receipt is exhibit RW 4-B. Under these circumstances, it is clear that even this specific allegation was made without any basis against respondent No. 4 as he had only one car bearing No. RSL 800, which was delivered to one Shri M.S. Ahluwalia, on the basis of the letter written by Shri B.K. Bedi, the then joint managing director of the company. It is not disputed that respondent No. 4 was an employee, though later on he was made one of the directors of the company for administrative purposes. Respondent No. 4 resigned as a director from the company with effect from October 14, 1967. His resignation was accepted by the board of directors at its meeting held on March 6, 1968, much before the order of winding up. It is made clear that a director who resigns can be proceeded against under sections 542 and 543 of the Act. But, this is an important fact in the present case that respondent No. 4 resigned with effect from October 14, 1967. In his affidavit, the official liquidator, however, maintained that respondent No. 4 continued to be the director till the passing of the order of winding up. Even in his cross-examination, held on August 7, 1984, the official liquida ..... X X X X Extracts X X X X X X X X Extracts X X X X
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